ISM Services PMI Hits 54.4% in December, Posting Strongest Reading of 2025

The Institute for Supply Management delivered encouraging news for the U.S. economy Wednesday, reporting that its Services PMI registered 54.4% in December—the highest reading of 2025 and a clear sign that the services sector is ending the year on solid footing. The reading exceeded economists' expectations of 52.2% and marked the 10th consecutive month of expansion.

Perhaps more significant than the headline number, December marked the first time since February 2025 that all four major subindexes—business activity, new orders, employment, and supplier deliveries—simultaneously registered in expansion territory. The breadth of improvement suggests the services expansion has become more durable and broad-based.

Breaking Down the Numbers

The Services PMI is a diffusion index, where readings above 50% indicate expansion and those below signal contraction. December's 54.4% reading represents a 1.8 percentage point increase from November's 52.6%, a substantial monthly improvement that caught many forecasters off guard.

"The Services PMI finished 2025 on a positive note with its 10th month in expansion territory and its highest reading of the year. For the first time since February, all four subindexes are in expansion."

— ISM Services Survey Committee Chair

Key subindex readings for December:

• Business Activity/Production: 58.2% (up 4.5 points)
• New Orders: 54.7% (up 1.9 points)
• Employment: 51.3% (returned to expansion for first time since May)
• Supplier Deliveries: 52.1% (up 1.6 points)

The Employment subindex returning to expansion is particularly noteworthy. The services sector accounts for roughly 70% of U.S. economic activity and an even larger share of employment. A hiring rebound in services suggests the labor market remains healthier than some indicators have implied.

Prices Moderate, Easing Inflation Concerns

In a development that will please Federal Reserve officials, the Prices Index moderated to 64.3%—still indicating rising input costs, but at the slowest pace since March 2025. The reading was 1.1 percentage points below November and 1.8 points below the 12-month average of 66.1%.

While any reading above 50% indicates prices are rising, the direction of change matters for monetary policy. The deceleration suggests inflationary pressures in the services sector may be gradually cooling, even if they haven't disappeared entirely.

Survey respondents cited mixed pricing dynamics across industries. Some noted that tariff concerns were prompting suppliers to push through preemptive price increases, while others reported competitive pressures that limited their ability to pass costs to customers. Seasonal factors, including holiday demand patterns, also influenced December pricing.

Industry Performance Varies

The December report revealed varied conditions across the services landscape. Eleven of the 17 industries tracked by the ISM reported growth, while six contracted—a ratio consistent with modest but uneven expansion.

Industries reporting growth in December, listed in order of strength:

• Retail Trade
• Finance & Insurance
• Accommodation & Food Services
• Transportation & Warehousing
• Arts, Entertainment & Recreation
• Mining
• Health Care & Social Assistance
• Information
• Wholesale Trade
• Public Administration
• Utilities

The strength in Retail Trade and Accommodation & Food Services reflects the robust holiday season that saw consumers spend at record levels despite higher interest rates. Finance & Insurance benefited from strong stock market performance and elevated deal activity.

Market Reaction

Financial markets responded positively to the data, though the reaction was muted by the prior day's strong gains. The S&P 500 held near record levels, while Treasury yields edged higher as traders recalibrated rate expectations.

The strong services reading complicates the interest rate outlook by suggesting the economy may not need as much monetary stimulus as some had anticipated. If services remain robust, the Federal Reserve may feel less urgency to cut rates, potentially keeping borrowing costs elevated longer than markets had hoped.

Bond traders adjusted their expectations slightly following the report. The probability of a January rate cut, already low, fell further, while expectations for cuts later in 2026 also moderated. The data supports the Fed's recent messaging that it can be patient in evaluating incoming information before adjusting policy.

What Business Leaders Are Saying

Survey respondents offered colorful commentary on conditions in their respective industries. Tariff uncertainty was a consistent theme, with businesses expressing concern about potential cost increases while simultaneously noting that actual impacts had been limited so far.

"Business is strong heading into 2026. We're cautiously optimistic but watching tariff developments closely. Customers are placing orders now partly to lock in current pricing."

— Survey respondent from Manufacturing sector

Seasonal hiring and the transition from holiday staffing to regular operations also featured prominently in the commentary. Several respondents noted challenges finding qualified workers, though the pressure was described as less intense than at the peak of the post-pandemic labor shortage.

Looking Ahead to 2026

The December reading provides an encouraging jumping-off point for the new year. With consumers still spending, businesses still hiring, and price pressures gradually moderating, the services sector appears positioned for continued expansion—though perhaps at a more measured pace than the December surge implies.

Several factors could influence the trajectory in coming months. The Federal Reserve's policy stance will affect borrowing costs for businesses and consumers. Tariff implementation could disrupt supply chains and push up costs. And the transition to new political leadership may bring policy changes that ripple through the economy.

For now, the ISM data reinforces the picture of an economy that continues to defy pessimistic forecasts. The much-anticipated recession has failed to materialize, and the services sector—the economy's largest component—is demonstrating resilience that has surprised many observers.

Investment Implications

For investors, the strong services reading supports the case for continued economic expansion and corporate earnings growth. Companies exposed to consumer spending, financial services, and business services may continue to benefit from favorable conditions.

However, the data's implications for interest rates warrant attention. If the economy remains stronger than expected, the Fed may keep rates higher for longer, which could eventually weigh on interest-rate-sensitive sectors like housing, utilities, and highly leveraged companies.

The December services report adds to a growing body of evidence that the U.S. economy is proving more resilient than many anticipated. For investors betting on continued growth, the data provides validation. For those positioned for a downturn, it's another reminder that timing economic turning points remains exceptionally difficult.